The market has seen a sharp rise in the price of oil over the past three weeks. The price of a barrel of oil has surged from $88 to over $100 per barrel. During this same period, Freddie Mac has reported that fixed mortgage rates have moved from 5.75% to now over 6% for a thirty year fixed loan. This is up sharply from a low of 5.33% that the market saw in January. So the major question is whether or not there is a correlation. The short answer is yes, there is a correlation between the two, although they are not directly linked. Oil makes up a large percentage of spending for the U.S. economy, as the cost of this rises it creates an inflationary pressure on the market. Their is a direct correlation between inflation and mortgage rates. Mortgage rates tend to move up when their are high levels of inflation. This is a direct result of investors wanting a higher return on their investment into mortgage bonds or mortgage backed securities, whose return on investment can become diminished with higher levels of inflation. A simple analogy is that investing a dollar and expecting a return of a dollar twenty five over a four year period becomes less beneficial if four years down the road you can not buy the same commodity today for less than a dollar twenty five, essentially you would have lost money on this investment.

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